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Woodford backs AstraZeneca after Mystic crash

Star fund manager Neil Woodford says ‘febrile’ stock market completely over-reacted to AstraZeneca's setback in Mystic drugs trial.

Woodford backs AstraZeneca after Mystic crash

Yesterday’s 16% plunge in the shares of AstraZeneca (AZN) was a massive stock market over-reaction, according to star fund manager Neil Woodford.

Citywire A-rated Woodford, a top 10 investor in AstraZeneca, acknowledged the failure of the phase III Mystic trial of a lung cancer treatment combining the group’s Imfinzi and Tremelimumab drugs had been a setback. It showed the combination did not have a better result on patients than standard chemotherapy.

However, he said it was the failure of just one part of a bigger trial and that the overall survival data had yet to be published. He noted that Imfinzi was already an effective cancer treatment and was approved for use in advanced bladder cancer.

More importantly, Woodford, who holds over 8% of his £10 billion Equity Income fund in Astra, its largest position, insisted that the growth strategy of the UK’s drugs giant was intact and that he retained faith in the ability of Astra boss Pascal Soriot to deliver it.

‘Across a broad spread of disease areas, the company is developing new ground-breaking therapies which have significant commercial potential. Much of that is more visible today than at any stage since its CEO, Pascal Soriot, set out his strategic goal to double sales by 2023,’ he said.

Woodford, said the company’s good half-year results had been overlooked as investors rushed to sell.

‘The company has announced interim results for the six months to the end of June, which overall are ahead of expectations, driven by sales which are better than anticipated and good cost control which again has surpassed analysts’ forecasts,’ he said in a blog on his website.

The company’s guidance for full-year profits was unchanged, he noted.

Big deal

Also overlooked by panicky investors was a separate phase III trial of Astra’s Tagrisso lung cancer treatment in a different setting. ‘This is very good news,’ Woodford (pictured) claimed.

The fund manager was even more impressed by the last of yesterday’s announcements by Astra: a collaboration agreement with rival Merck to develop two other Astra cancer therapies, Lynparza and Selumetinib. Under this Merck will pay Astra up to $8.5 billion with an upfront payment of $1.6 billion. ‘This is clearly a very significant financial deal,’ Woodford commented.

‘Perhaps, at a time like this when the stock market is in such a febrile state and prone to overreact to news, especially when it is bad, it is important to remind investors that all four of the large immuno-oncology players (Roche, Merck, Bristol-Myers Squibb and AstraZeneca) have all had cancer trial setbacks in recent months,’ reassured Woodford.

He continued: ‘The question I have to ask is, what is discounted in the share price? Not just today, but since I have had the holding and of course looking forward over the next three to five years.

‘My view remains that very little of what I believe the company will achieve is reflected in today’s share price and even more so after today’s fall,' he wrote on Thursday.

'The shares are simply too cheap and in a market liberally populated with expensive equities the investment case for AstraZeneca remains, in my view, very attractive,’ he concluded.

After an initial dip this morning the shares regained some poise and closed 3.6% or 156p higher at £44.68 as investors wondered if Astra could become a bid target.

Bailey bailed

Liontrust fund manager Stephen Bailey was grateful to have sold most of his holding earlier this year. The co-manager of Liontrust Macro Equity Income said he had reduced the fund’s position in Astra from over 5% at the end of last year to 0.8% over concern at the risk in its drug development programme and its emphasis on immune-oncology, which uses the body’s immune system to fight cancers.

His move was prompted by the failure of US rival Bristol Myers-Squibb (BNY.N) whose shares plunged over 20% in August after the failure of its phase III CheckMate study into Opdivo, a skin cancer treatment. The shares also fell 5% yesterday in response to Astra's setback.

‘We’re not negative on global healthcare as a theme – in fact we’re so positive on the sector’s unique macro-thematic backdrop and the associated tailwinds to earnings, dividends and valuations that it makes up about 15% of the Liontrust Macro Equity Income fund,’ said Bailey, who last received a Citywire performance rating a year ago.

Bailey’s top holding in the fund he runs with Jamie Clark is a 6% position in Astra's arch UK rival GlaxoSmithKline (GSK). This is the opposite of Woodford who sold Glaxo after becoming disenchanted with its prospects.

On Astra, Bailey commented: ‘Since January we’ve seen the company’s share price rise from around £45 to near £55 – much of this on the expectation of a positive result to Mystic. As the adage goes – “it’s better to travel than to arrive”. With the stock priced for success, we felt a disappointment would be a big shock, and saw the need to do something in advance of the outcome.’

Results from the Mystic trial had been keenly awaited by the drugs industry where using the body’s immune system to fight cancer has become a huge growth business.

Bad omen

Ketan Patel of EdenTree Investment Management wasn’t convinced the two further results from the Mystic trials would be good: ‘this early setback doesn’t augur well for a therapy that was forecast to have peak sales of $4 billion in 2023.’

Astra shares were already weak before yesterday’s announcement following report that Soriot had been in talks to join an Israeli company. He is under pressure from shareholders having rejected a $118 billion takeover attempt by Pfizer (PFE.N) three years ago.

‘The 5% yield may provide a floor in the near term, but investors will need strong stomachs to continue to hold the name, said Patel, an unrated manager of EdenTree’s Amity UK and UK Equity Growth funds.


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Stephen Bailey
Stephen Bailey Average Total Return:
145/165 in Equity - UK (All Companies) (Performance over 3 years)
Ketan Patel
Ketan Patel Average Total Return:
81/205 in Equity - UK (All Companies) (Performance over 1 year)
Neil Woodford
Neil Woodford Average Total Return:
165/165 in Equity - UK (All Companies) (Performance over 3 years)

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